FII flows to drive the market in near future: Bhavtosh Vajpayee, Barclays

In an interview with ET Now, Bhavtosh Vajpayee, Managing Director & Head-India Equities, Barclays, shares his views on the stock market and some sectors. Excerpts:

ET Now: What is your broad call on the market range for the next 12 months?

Bhavtosh Vajpayee: India is heading into elections and several macro variables continue to be challenging. I would say that the baseline for India remains sluggish and challenging. At the same time, there are a few aspects which could create pockets of hope - the allocation to India from emerging market portfolios, where when India is compared with other emerging economies, none of them incidentally are doing very well. Therefore, relatively we stand out.

Secondly, government spending could pick up in the run up to the elections. There could be further interest rate cuts and a base effect on certain macro variables, be it the WPI inflation or IIP growth numbers.

It is a mixed picture with no significant breakout on the upside and no upturn in the economy expected. At the same time, flows will continue to drive the market and to some extent those flows will be determined by India's standing in the emerging market world.

ET Now: How do you see the markets post elections? Will equities take a turn for the better, in your view?

Bhavtosh Vajpayee: The picture will definitely change, for better or for worse is something that only time will tell.

The equity markets would want a stable coalition with the largest party getting at least 180, if not 200, seats. There have been optimists in the market hoping for early elections. However, at this time we do not think that will happen and we have many months to go before we get an election result. Hopefully, we get a strong coalition and that could lead the markets up. On the other hand, if the elections are inconclusive, things could actually take a leg down.

ET Now: Why are you still bullish on pharma after the recent run up?

Bhavtosh Vajpayee: Healthcare has been one of our top overweight sectors and the biggest driver has been its sustained earnings growth, coming not just from the domestic market but increasingly from the US as well as the rest of the world market.

Most of the healthcare companies are looking at least 18% yearly earnings growth over the next two years, some are above 20%. It is a good balance where earnings will continue to expand, near opportunities in terms of new drug filings continue to come in and you have that faith of earnings expansion going on steadily. At the same time there are certain tailwinds from the weakening rupee, but that is not the core of the story.

ET Now: What is your outlook on the telecom space and do you see recovery in these stocks?

Bhavtosh Vajpayee: The hope in telecom is that the sector will consolidate behind the key players. The market share of the key players has been increasing. At the same time, a breakout requires better quarterly performance, better operating results and end to the price war that has characterised the sector, all of which will take time.

We are positive on Bharti, which has not done much so far, but our view is dependent on attractive valuations and at the same time continuing consolidation.

ET Now: Is there still some more upside left in large cap IT stocks?

Bhavtosh Vajpayee: Incidentally, gains have not been enough to compensate for the weaker currency. If you just take on a mathematical result, the stocks should have gained a lot more than what they have, and it shows that the markets are not confident of where the top line growth of this industry will lie for this year. There is a debate on whether these companies will grow 8%, 10% or even 15% and a large part of that has been caused by the gap in performance between TCS on the one hand and Infosys on the other.

Our sense is that, as the year goes by, we will have a greater faith in the core revenue growth of the sector, which should look good and at the same time also gain faith in their ability to defend margins on a longer term. Obviously, margins do fall when large deals are done and there could be quarterly dips in margins for vendors who are winning these deals. But the sector needs to resolve the debate on revenue growth. We currently believe that the debate will be resolved positively.

Â ET Now: Do you like the oil and gas space in general?

Bhavtosh Vajpayee: Reliance is investing a lot of money into new projects, but the impact on earnings is still some time away. We think that the real earnings growth for Reliance will start coming from the fiscal 15 onwards.

It is a debate within certain skeptics on whether one should look at this pack as independent play or an extension of the government's balance sheet. The policies around the sector and their economic impact keep changing and that has prevented a secular story from emerging in the sector. Therefore, we are looking at core value in the sector wherever we can find it.